Fed Vice Chairman Bolsters Rate-Cut Hopes

Updated from 9:39 a.m. EST

Federal Reserve Vice Chairman Donald Kohn gave hope to the rate-cut camp Wednesday, saying that the current state of the financial markets means the central bank must be "flexible and pragmatic."

Speaking in New York, the Fed's No. 2 banker behind Chairman Ben Bernanke acknowledged that the level of uncertainty surrounding the economy is unusually high at the moment, given the unrest being caused by questions about subprime mortgages and asset-backed securities.

"In my view, these uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago," he said.

Fed members, knowing that everything they say will be dissected repeatedly, tend to choose their words carefully, and Kohn's use of "nimble" regarding policy moves will bolster those in the market who want to see more rate reductions.

The Fed has cut overnight lending rates by a total of 75 basis points at its last two meetings, taking the fed funds target rate down to 4.50%. A number of officials, including Philadelphia Fed President Charles Plosser and Chicago Fed President Charles Evans on Tuesday, have recently hinted that additional easing isn't a guarantee, especially as long as they consider inflation a threat.

Still, Fed bankers have consistently stated that they will act as needed in order to ensure price stability and full employment, and Kohn echoed that sentiment.

Kohn also offered an interesting take on the potential for Fed actions to create a "moral hazard" -- that is, bailing out investors who took risks that are now coming back to haunt them.

"People should bear the consequences of their decisions about lending, borrowing and managing their portfolios, both when those decisions turn out to be wise and when they turn out to be ill-advised," he said. "At the same time, however, in my view, when the decisions do go poorly, innocent bystanders should not have to bear the cost."